abc

www.mottmac.com
1
 CONTRACTS FORUM
IDENTIFYING AND MANAGING CONTRACTUAL RISK

DESIGN AND BUILD

G ROGERS
2 abc
Purpose of the presentation

 Identify the risks which exist in the D&B

procurement method which are additional to those
encountered in the traditional approach or are
additionally onerous.
 Suggest methods for avoiding or at least mitigating
such risks.

3 abc
 Identifying the risks.

4 abc
Contractual Significance of D&B

 Traditional Arrangement

– Designer employed by client.

– Contractor employed by client.

• Design and Build

– Designer employed by contractor (maximum risk during construction wrt
any design changes)
– Contractor has package contract (liability for all design matters incl
making the design fit in respect of different designers (architect, structural
engineer, BS engineer and sub-contractor designed items )
– Risk has substantially increased for contractor - some of these risks may
be transferred to the designer as we shall see.

5 abc
Contractual Significance of D&B

 Obligations on designer and contractor :

 (i) Traditional arrangement

 Under common law and statute (Supply of Goods and Services Act 1982)
designer has the obligation to supply services with reasonable skill and care
 Under common law and statute (again Supply of Goods and Services Act 1982)
a contractor is under the obligation to supply goods both fit for purpose and
of merchantable quality but the former is subject to the test of reliance. This
means that where the client supplies a design the client is not so relying on
the contractor and the contractor is relieved of his obligation to the extent
that the design is supplied to him.
 (ii) Design and Build.

 No design supplied by client therefore full reliance and full obligation upon
the contractor to provide works which when completed are fit for purpose.

6 abc
Contractual Significance of D&B (cont’d)

 In the absence of any implied term to the contrary the designer is still
only under an obligation to provide design services (to the
contractor) with reasonable skill and care but most D&B design
appointments contain the following back-to-back provision as an
extension to the designer’s common law and statutory obligations:
 “The designer shall perform the services with reasonable skill and
care and as a separate and additional obligation so as not to cause or
contribute towards the contractor being in breach of the construction
contract” and we sometimes see additionally:
 And further without limitation to the above the designer shall assume
and perform all the obligation and accept all the liabilities of the
contractor under the construction contract so far as they touch or
concern the design services to be performed under the works contract

7 abc
Contractual Significance of D&B (cont’d)

 By not providing design services which allow the contractor to

comply with the contractor’s obligations (i.e. allow him to construct
works which are fit for purpose) the designer is therefore placing
himself in breach of the design appointment.
 Thus it can be seen that it is the existence of the so-called back to
back provision in the design appointment (and not the D&B
procurement method in itself) which increases the level of
performance required of the designer from reasonable skill and care
to a fit for purpose design.
 It is therefore the qualifications and amendments to the back to back
provisions which are the key to dealing with the additional design
risks imposed on the designer in most D&B design appointments.

8 abc
Contractual Significance of D&B (cont’d)

 Exclusion no 8 of MM’s PI Insurance Policy

– “The Policy shall not indemnify the Assured in respect of:
8. Any claims arising out of building or product performance
warranties ……….unless the liability ……..would have
existed in the absence of such warranties or clauses”

 Conclusion
– B to B clauses will give rise to UNINSURED liabilities

9 abc
The various D&B contracting scenarios
encountered and their risk profiles.
 (i) Designer appointed post tender by contractor
with no pre-tender services.
 (ii) Designer appointed pre-tender to provide pre
and post-tender services (if contractor wins job).
 (iii) Designer appointed pre-tender by a client with
novation after contract award to the successful
contractor.

10 abc
The various D&B contracting scenarios
encountered and their risk profiles Scenario (i)
– Designer appointed post -tender

•The risk profiles for the contractor and designer associated with
each scenario are as follows: (It should be noted that the fitness
for purpose design risk may be relevant to all scenarios
depending upon terms of design appointment and in particular
any back-to-back provision.)
•(i) Risks for Contractor: may only have overall layouts of facility
upon which to base quantities and cost estimate. Many risks
passed down from main contractor.
•(i) Risks for Designer: Risks in relation to re-performance of the
services and possible fitness for purpose design obligations as
above passed on to designer.

11 abc
The designer’s risks are:

 Re-perform design services in order to accord with

contractor’s design budget.
 Re-perform design services to accord with site
conditions.
 Re-perform design services to coordinate with
others’ (e.g. sub-contractor’s) requirements.
 Possibly become liable to the contractor for changes
required to any works as a result of being in breach
of the obligation to provide a fit for purpose design

12 abc
The various D&B contracting scenarios
encountered and their risk profiles Scenario
(ii) – Designer supplies pre-tender design to
contractor.
 (ii) Risks for Contractor: Contractor now has the benefit of at
least a partial design performed by the designer during the
pre-tender period but many of the other risks as outlined in (i)
still remain.
 (ii) Risks for Designer: If the designer has done a competent
job at the pre-tender stage and has identified and made
provision in the design for the bulk of the items and quantities
then the risk of having to re-perform design to accord with
budgetary requirements has now reduced but pre-tender
design needs to be suitably qualified.

13 abc
The designer’s risks are:

 All of the previous under scenario (i) plus:

 Having to make the detailed design work in
accordance with the philosophy that was developed
at the pre-tender stage.
 If (despite advice from contracts dept.) designer has
warranted quantities, making the design work
within those strictures of those quantities.
 Not adequately warning the contractor as to
contingencies as to time and budget he should
allow for in his tender.

14 abc
The various D&B contracting scenarios
encountered and their risk profiles. Scenario
(iii) Pre-tender services to client with novation
to contractor for post tender design
 (iii) Risks for Contractor: In this scenario the pre-
contract design is likely to be much more complete
than in scenario (ii) and therefore the risks in
uncertainty of quantities has diminished.
 (iii) Risks for Designer: Again contractor is placing
reliance on the designer’s incomplete design and
again previous risks to the designer as outlined
under scenarios (i) and (ii) still exist. The
complications of novation from client to contractor
are now present.
15 abc
The designer’s risks are:

 All of the previous under scenarios (i) and (ii) plus:

 Risks inherent in the fiction that the pre-tender design

provided for the client was also provided for the benefit of the
contractor.
 Risks inherent in the novation process such that contractor is
too late on the scene to be informed of the construction risks
which the designer has identified at the pre-tender stage.
 Risk that designer identifies the above risks but fails to realise
their importance with respect to the novated contractor.

16 abc
An examination of the nature of the
fitness for purpose obligation and its
practical implications in D&B contracts.
 As previously described, except where expressly or
impliedly provided for in the design appointment,
there is no requirement in the traditional
procurement method (designer prepares design of
behalf of the client and it is supplied to the
contractor) that the design be fit for purpose but
merely that it be carried out with reasonable skill
and care. However, in the context of D&B, the
obligation can instead become one of fitness for
purpose.
17 abc
An examination of the nature of the
fitness for purpose obligation and its
practical implications in D&B contracts
(cont’d).
 What do we mean by “fitness for purpose”?
 No universal definition but may be regarded as being:
 “reasonably suitable for its intended use as contained in or may
reasonably be implied from the contract” (Note subjective nature of
this test).
 Q. The above sounds reasonable so why do designers shy away from
this obligation?
 A. Principally because as we have seen designers cannot get PI
insurance which covers them for this obligation and also because of
the strict (i.e. regardless of the circumstances) nature of the
obligation.

18 abc
 Managing and mitigating the risks.

abc
Risk mitigation and management
techniques in D&B design appointments.
 Scenario (i) - Post tender services only.
 Try to include standard MM limitation clause in all
appointments.
 In the absence of the above, Define any “fitness for
purpose” provision expressly provided for or
imported by back-to-back provision in the
appointment.
 Absence of both of the above constitutes a “show-
stopper” in the context of any fitness-for-purpose
obligations/liabilities.

20 abc
Risk mitigation and management techniques in D&B
design appointments - Scenario(i).

 Avoid obligations to perform services in accordance with a

budget or unqualified obligations to perform “value
engineering” exercises.. (Obligation to use reasonable skill
and care to address economy as parameter may be
acceptable).
 Avoid unqualified obligation to coordinate your design with
others’ designs.
 Avoid unqualified obligations to coordinate and manage the
whole of the design process.
 Avoid ambiguous obligations to warn the contractor of
matters that “might cause the cost of the works to increase”
 Avoid things like “the designer shall ensure that the works as
carried out on site are in accordance with the construction
contract”

21 abc
Risk mitigation and management techniques
in D&B design appointments- scenario (i)

 Avoid obligations to advise the contractor on any

matter which in the normal course of events he
would be completely responsible for.
 Avoid obligations/liabilities as to apportionment of
any risk.
 Be very wary of any obligation to get involved in the
contractor/client gain pain mechanism.

22 abc
Risk mitigation and management
techniques in D&B design appointments.
 Scenario (ii) Pre and post-tender services.

 All of the previous under scenario (i) applies plus:

 Design appointment must recognise the differences between

the services being provided at pre-tender and post-tender
stage and there must be a recognition that the risk register
will be compiled.

 If post-tender services are to follow on automatically from pre-

tender if contractor’s tender is successful, then it must be on
the basis that the pre-tender design forms the basis for the
post-tender design.

23 abc
Risk mitigation and management
techniques in D&B design appointments.
 Scenario (iii) Pre-tender services to client with novation to
contractor post-tender.
 All of the previous considerations under scenarios (i) and (ii)
apply plus:
 Existence of novation from client to contractor should be on
terms such that risk profile to MM is not substantially
increased compared with scenario (ii) situations.
 Construction Industry Council Novation Agreement.

 Risk Register identifying risks and identifying the party

responsible for them in accordance with the construction
contract.

24 abc
Things we like to see in D&B design
appointments:
 Overriding provision such that “notwithstanding any other term to
the contrary in this or any related document, the designer is under no
greater obligation or liability for breach in relation thereto than to
exercise reasonable skill and care.”
 Express provision such that designer is entitled to additional cost and
time if he is required to re-perform any services which at the time of
first performance were performed in accordance with the design
appointment.
 Adequate variations provision which may incorporate the above
 Limitations/exclusions of liability in the usual MM format.
 Schedule of rates for valuation of additions and re-performance.
 “de minimis” values for any claim made against designer when design
contains minor error.

25 abc
Things we don’t like to see in D&B
design appointments:
 Fitness for purpose obligations and liabilities either
contained within or imported into the design
appointment by way of the back-to-back provision.
(Unless effectively overriden as previous).
 Obligations to perform and re-perform designs
within pre-determined budgets or perform open-
ended amounts of VE and “design reviews.”
 Obligations to accept risk of any sort (other than
the usual designer’s risks as previously advised.)
 Express obligations to warn contractor

26 abc
(More) things we don’t like to see in D&B
design appointments:
 Obligation to “ensure” the adequacy of the
contractor’s works.
 Warranties as to the adequacy and completeness of
pre-tender designs and risk registers.
 Ab-initio type novation provisions.
 Any term which obliges the designer to provide
anything to both the client and any contractor at the
same time. (Generally applies pre-novation when
the client wishes the preferred bidder to get
involved.)

27 abc
28 abc
abc
www.mottmac.com
29